Speeches and presentations
Matt Whineray's speech to Responsible Investment Association Australasia (RIAA) NZ Conference
POSTED ON: 8 August 2023
Thank you for inviting me to take part in this year’s conference. The opportunity to get together with like-minded people is incredibly valuable - to compare notes, share experiences, and challenge and learn from each other. It has always been a way for us to keep up with the important developments in responsible investment.
We appreciate the platform for collaboration that RIAA provides its members, and this conference is a great example of RIAA’s strategy in action. I would like to acknowledge Simon and the splendid work he has done in leading RIAA the last 10 years. Under your leadership, RIAA has developed into a key institution for driving change.
While our mandate requires us to focus on the future, it is valuable to reflect on how we have got to where we are – and with next month marking 20 years since the Super Fund began investing, this is a great time to do that.
Back then, in 2003, RIAA was three years old, and still operating under its birth name, Ethical Investing Australia.
The values-based approach to investing that name implies was also the basis for the NZ Super Fund’s initial investment approach.
Section 61 of the 2001 legislation that established the NZ Super Fund requires us to have a statement of investment policies, standards, and procedures that covers (amongst many other things) ethical investment – including policies, standards, or procedures for avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.
So the first question the first Guardians had to consider was how to design an ethical investment policy – to figure out what an ethical investment policy looks like for a sovereign wealth fund that serves not only the vast variety of people that make up Aotearoa today, but also their children and grandchildren.
Initially, our focus was on avoiding harm, on establishing what we needed to not do in order to avoid prejudice to New Zealand’s reputation. We were also mindful that we should invest in a way that aligned with the policies and commitments of the New Zealand government. Our founding legislation requires us to discharge our duties to present and future New Zealanders – all while maximising returns without undue risk to the Fund as a whole.
But we live on a single planet, after all – and there is not much point in building up a store of wealth for future generations if in doing so we create an unliveable environment for them.
Responsible investment is evolving rapidly. In the same way that Ethical Investing Australia became the Responsible Investment Association of Australasia, our Responsible Investment framework has been through many changes and has now become a Sustainable Investment framework. This evolution reflects our view that these issues are essential considerations in any investment management strategy worth its salt.
We believed then, and we continue to believe, that environmental, social and governance considerations are fundamental to long-term risk and return. Our investment beliefs in relation to responsible investment evolved over the years, and we later developed a specific approach to climate change.
We’ve been challenged on the decisions we have made. However, we have consistently maintained the view that best practice investing requires proper consideration of ESG-related risks and benefits. And it needs to be from the investment perspective, because ultimately everything is financial. In the long term, those externalities all come home to roost.
Yes, the market is slow to respond to the signals the changing climate is sending us. Yes, the social cost of emissions is not properly felt by those responsible for those emissions. Yes, the transition away from fossil fuels is happening more slowly and more hesitantly than we would like.
However, the transition is under way. The social cost is increasingly being borne by those responsible. And very clearly the climate is changing. Failing to consider those factors introduces undue and uncompensated risk into a portfolio. The view on which assets might become ‘stranded’ moves quickly. Ask yourself whether your view on Auckland clifftop real estate or of forestry in hard-to-harvest places as investment opportunities has changed in the past six months.
The financial relevance of responsible investing considerations is increasingly widely accepted. That has been the case for some years, but the pace of change is picking up. There is no doubt that the demand for a more sustainable financial system is growing. That is a development that we have recognised and embraced.
In 2011, Mercer published its first global research report on climate change and asset allocation. In 2014, we were part of a group of investors that commissioned Mercer to do further work.
The Mercer studies galvanised the financial sector into treating climate change as a systemic risk; for us, they helped guide the development of the climate change investment strategy that we introduced in 2016.
The strategy was based on the view that climate risk was not being properly priced by the market. So climate change was a risk that we were not being properly compensated for. And if the portfolio is exposed to such a risk, that is an “undue” risk in the context of our investment mandate, and we must do something about it.
When we launched our Climate Change Investment Strategy in 2016, we started to decarbonise the portfolio, it was about the need to avoid undue risk. It was the investment case that got our climate strategy across the line. The implementation of that strategy dramatically reduced the emissions intensity of our portfolio and all but eliminated our exposure to potential emissions from fossil fuel reserves.
And it has not cost us anything to do this in terms of returns in the six years we have been operating the strategy.
But as things moved on, it became apparent that doing better than last year, in terms of emissions, or whatever metric is chosen, is not enough. Investors and companies need to ask whether what they are doing is consistent with the outcomes we all need – this is where things like taxonomies, science-based targets and Paris aligned approaches become really important.
So our next step was to move from the carbon reduction targets we created ourselves to an off-the-shelf index aligned with the Paris targets. A year ago, we completed the shift to the MSCI World Climate Paris Aligned Index and its Emerging Markets counterpart.
We are now working on incorporating ESG and Net Zero considerations into our multifactor equity portfolios, the next biggest chunk in our portfolio, setting our managers the task of delivering factor portfolios consistent in terms of their ESG profile with the Paris Aligned Index.
Our experience to date has strengthened our belief that investment managers can incorporate ESG standards without significantly reducing the market exposures we are seeking, and without significantly increasing their tracking error.
Any investor looking to develop a sustainable investment strategy needs to work out how to integrate ESG considerations into the investment evaluation process. The indices we have chosen for our global equities portfolio do a lot of the heavy lifting, but they are just one part of a four-part strategy to respond to climate change, including analysis, engagement and investing in the transition.
Our investment belief means that sound ESG characteristics are not nice-to-haves or after-thoughts; they are essential requirements of best practice portfolio management
So it was natural for us to look to improve the ESG profile of our whole portfolio by incorporating ESG factors into our investment screening process, rather than by looking to allocate a small wedge of our portfolio to positive or impact investments.
In 2021, we adopted a new organisational purpose statement: sustainable investment delivering strong returns for all New Zealanders. This reflects our decision to shift from a Responsible Investment approach to managing our portfolio to an approach based on the principles of Sustainable Finance.
This might sound semantic, like a distinction without a difference, but it’s not. In essence, the shift to Sustainable Finance represents a change from considering the potential impact of ESG risks on our portfolio to also considering the potential impact of our investments on environment and social outcomes.
It is, and will always be, a work in progress. Perfection is elusive, and our investment decisions inevitably involve balancing competing considerations.
Locally, we work closely with the other Crown Financial Institutions – ACC, the Government Superannuation Fund and the National Provident Fund – to establish common metrics for reporting on our progress towards decarbonising our respective portfolios, and we are now extending that into a joint initiative that will see us engage with companies in the NZX50 to build a better mutual understanding of the new mandatory climate reporting requirements for large companies and how they will align themselves with the net zero commitment over time.
Collaborations such as these are essential, our voices are always going to be stronger when we work together.
But I think we need to question whether these and other voluntary measures are sufficient to drive the changes we need to see.
Voluntary acts by investors and companies like us are a great start. But decarbonising our portfolio through changing the make-up of the global equities portion, while it reduces our exposure to this risk, won’t do much to change the real-world outcome: we need new capital to flow to funding the transition, and we need governments and regulators to act as well.
The market can’t do it all. Mechanisms based on prices and property rights are inherently biased towards maintaining the status quo: we need to change the rules of the game.
Economists have proven to be good at identifying the existence of externalities, but not so good at identifying how to practically navigate the political challenges in order to incorporate the costs and benefits of those externalities into the real world, into our economies. To quote operations research theorist Stafford Beer, we cannot regulate our interaction with any aspect of reality that our model of reality does not include. And there are plenty of things that our economic model does not include. And it’s no coincidence that these are the things we call systemic risks.
In other words, as long as capitalism denies externalities, our voluntary activities can’t get us out of the bind we’re in.
Agency issues mean many companies are more likely to lobby for exemptions to the rules than to look for new ways of working that will align them with the long-term objectives of all of us who inhabit this planet. From a narrow ‘profit-maximisation’ perspective, this activity can be rationalised. It is a particularly insidious activity. It’s companies holding up their climate reporting while paying industry bodies to lobby against regulation that would actually effect change. As the owners of these entities, we must ensure that our agents are not acting against our interests in this way.
While I have focused more on climate change, I could as easily have cited one of the many other systemic risks that are emerging around the world. The loss of biodiversity, anti-microbial resistance (this one is truly terrifying), persistent inequality and consequent social instability, to name a few. The systemic nature of these risks means that investors like the NZ Super Fund, a universal owner with a very long horizon, can’t stock pick our way around these problems, or diversify away from them – they are innate to the system.
We need to step up our engagement with policymakers and regulators to set the vision, build the structures and demand the disclosures that will help the rest of us to compete within a system that is not working against our long-term objectives.
We need to change the way we behave, and we need to change the way we think. And we need to do that at a deep level – so this means not just changing the rules of the system – how it operates, and what is counted and what isn’t, but also the goals of the system. But deeper than that is changing the mindset from which the system arises. The mindset is the set of unstated beliefs within a society. In the investment sphere, the obvious example is Milton Friedman’s “the business of business is business” mantra. This became the accepted narrative and has caused untold damage. A phrase used to proudly justify all manner of anti-social, anti-environmental and externality-denying behaviour.
The environmental editor, Fiona Harvey, writing in the Guardian newspaper a few years ago put it this way: When we ask whether we can afford to tackle climate change, we are really asking whether we want humanity to survive in anything like our current structures. If our economic system stands in the way of doing so, perhaps it is the economics that are at fault. And economics, like politics, are just a human construct. The physics of the atmosphere are not.”
The climate anomalies that have shown up in the last month illustrate daily the urgency required. Having gone through 1.1 degrees, with 1.5 degrees likely locked in this decade, in recent weeks we’ve seen the highest temperatures ever recorded across large swathes of the globe; record sea-surface temperatures; deadly heat waves across Europe and North America; vanishing Antarctic Sea ice; historic rains in India and China.
We already knew it, but the weather extremes the world has experienced in 2023 demonstrate the need for action.
Sadly, at the same time these weather extremes are happening, we’re seeing political polarisation extend to the world of sustainable finance, with ESG being weaponised against investors and managers in countries such as the US.
These investors are looking to do the only sensible thing and incorporate these considerations into investment decisions, for the long-term benefit of their members and customers.
These are difficult times, but I’m optimistic we already have most of the solutions we need. We have the tools. The answers are in our hands. We just need to turn our commitments into action.
There will always be pushback from some quarters. There will always be different views. What I do know for sure is that the need for action on climate change and systemic risk more broadly is urgent and pressing. And the momentum for a more sustainable financial system is growing. I’m encouraged at the number of you here today – but we need much more.
RIAA has and will play an important part in that process, and I encourage you all to redouble your efforts both as part of RIAA and on your own.
Thank you again, Simon, for including me in today’s programme.
I will leave you with a whakatauki that speaks to why we are doing this work, and connects neatly with the name of the Centre for Sustainable Finance, Toitu Tahua
Toitū te marae a Tāne-Mahuta, Toitū te marae a Tangaroa, Toitū te tangata.
If the land is well and the sea is well, the people will thrive.